To generate passive income, I want shares with good long-term dividend potential. Right now, a lot of FTSE 100 share prices are depressed, and that pushes up dividend yields. The insurance sector is one, and I’m looking at Legal & General (LSE: LGEN) today.
Legal & General shares have fallen more than 20% in 2022, dropping close to levels we last saw during the pandemic.
The fall has had one desirable effect for those seeking passive income. It’s boosted the forecast dividend yield as high as 8.2%.
Cyclical volatility
The insurance sector tends to be cyclical. Along with banking, it often suffers disproportionately during an economic downturn. And that means dividends can be erratic.
So, for me, investing for the long term to cover such short-term volatility would be especially important if I went for Legal & General. Or any insurance shares, for that matter — I own Aviva shares, and the same arguments hold for the two companies.
Saying that, Legal & General is one of the few high-yielding FTSE 100 stocks that hasn’t cut its dividends in the last decade. But I’d still be cautious and allow for that to happen. For the aim of building a passive income pot, it’s the long-term average return that matters.
How many shares?
Now, 6,500 shares might sound like a lot. But they’re priced at 226p, at the time of writing. So that amounts to a total investment of £14,690. Should the dividend yield remain constant at the currently forecast 8.2%, that much invested in Legal & General shares would get me a shade over my targeted £100 per month.
Suppose I don’t have £15k spare to invest right now (which, as it happens, I don’t). How could I get there? Well, I’m still in my net investment phase, and I don’t want to take any passive income right now.
If I instead invest £100 per month in the stock at an 8.2% dividend yield, I’d have approximately £15,700 in just nine years. I could then retire and enjoy my extra £100 per month in passive income just from my 6,500 Legal & General shares.
If I double my monthly investments, I could get my pot up to the required amount in just five years. And that £100 per month is just from one single stock. If I can build a portfolio of 10 similar stocks, that could get me a cool £1,000 per month.
Illustration
Of course, to get these specific results, the Legal & General share price would need to remain unchanged over my investing period. And the dividend yield would have to be static at 8.2%. I think I can reasonably predict that that’s not going to happen.
I also haven’t investigated the risks of investing in this specific company. Any investor would need to satisfy themselves that it fits into their own comfort zone. And it’s very possible that it might take a bit longer to reach my desired passive income level than I’m suggesting here.
But this is just an illustration, meant to show what’s possible for long-term investors aiming to build a passive income stream from dividend shares.
